Higher Provision on Restructured Loans

Higher provisioning to dent banks' profits

The central bank order offsets CRR cut benefit, reduces scope for lending rate reduction, say banks

Business Standard / Oct 31, 2012, 01:10 IST A higher provisioning requirement for restructured standard loan accounts is likely to dent banks’ profit further in the current quarter. This would give them little scope to pare lending rates. The Reserve Bank of India (RBI) on Tuesday said banks would have to maintain 2.75 per cent of restructured standard loan accounts as provisions instead of the current two per cent, to ensure financial stability and mirror the international best practices. The move appears to have dwarfed the central bank’s decision to cut banks’ cash reserve ratio (CRR) by 25 basis points (bps) and infuse Rs 17,500 crore of primary liquidity in the system. AT THE RECEIVING END Impact of higher provisioning on banks’ profits Bank Impact on FY13 profit before tax (in %) Bank of India 4.5 Allahabad Bank 3.4 Corporation Bank 3.3 Punjab National Bank 2.9 Andhra Bank 2.8 Canara Bank 2.8 United Bank of India 2.5 State Bank of India 1.5 ICICI Bank 0.3 Axis Bank 0.4 HDFC Bank 0.1 Source: Emkay Global Financial Services “Part A (on CRR cut) is welcome. But in Part B (on higher provisioning), we had an unpleasant surprise. In fact, we were looking for some relief on the restructured front... Though we very much intended to give all of you good news, the path that has been taken will limit us to a great extent,” K R Kamath, chairman and managing director of Punjab National Bank, told reporters after his meeting with the RBI brass. He added: “The impact of a 75-bps additional provision is estimated around three per cent on the net profit of banks. I don’t think we are in a position to earn three per cent of the profit by the CRR cut. So, to that extent, we are in deficit now.” Earlier, the banking regulator had constituted a working group chaired by its executive director, B Mahapatra, to review the guidelines on restructured loans. In its report given in July, the group had suggested the provision on restructured advances be raised to five per cent, in a phased manner over two years. Anand Sinha, deputy governor at RBI, said, “We are going to bring it into operation from March 2013 balance sheet.” He was referring to new norms on restructuring assets. Analysts say the recent rise in loan restructuring cases is likely to have persuaded RBI to mandate the stringent norms. The number of cases referred to the corporate debt restructuring (CDR) cell increased to 392 at end-March 2012 from 225 as of March 2009. The total debt considered for restructuring was estimated at Rs 206,493 crore at the end of March 2012. Bankers, however, claim the record shows only 15 per cent of restructured assets have turned non-performing and a higher provisioning on restructured loans was not a necessity. They said RBI would come out with the final guidelines on loan restructuring and provisioning requirements by March 2013. State-run banks are expected to be more affected than their private sector rivals. “We expect this to impact our 2012-13 profit before tax estimates by 0.1 to 4.5 per cent, across various banks. Worst hit will be public sector banks like Bank of India, Allahabad Bank, Corporation Bank and Canara Bank,” said Dhananjay Sinha, economist at Emkay Global Financial Services. After the announcement, the National Stock Exchange’s 12-share Bank Nifty shed 2.4 per cent in on Tuesday ’s trade. http://www.business-standard.com/india/news/higher-provisioning-to-dent-banks-profits/491200/ Tue, Oct 30, 2012 at 17:14 Higher provisioning to affect banks profitability: CRISIL CRISIL Research has come out with its report on "Monetary Policy Review October 2012". The research forecasts net interest margins of the banking system to decline by 10-15 bps in 2012-13 as sluggish credit offtake will limit the pricing power of banks. CRISIL Research has come out with its report on "Monetary Policy Review October 2012". The research forecasts net interest margins of the banking system to decline by 10-15 bps in 2012-13 as sluggish credit offtake will limit the pricing power of banks. RBI hints at rate cut in early 2013 The Reserve Bank of India (RBI), in its monetary policy review on October 30th, reduced the cash reserve ratio (CRR) by 25 basis points (bps) to 4.25% while keeping the repo rate unchanged at 8%. Despite revising its 2012-13 gross domestic product (GDP) growth forecast sharply downwards to 5.8% from 6.5% projected in July 2012, the central bank refrained from reducing the repo rate. This is because upside risks to inflation remain due to high rural wage growth, inadequate supply response in food articles and temporary pressures from administered fuel price revisions. Persistently high non-food manufacturing (core) inflation, largely on account of cost-push pressures from rupee depreciation, was cited as a major concern. Despite a 50 bps reduction in the repo rate in April, 150 bps cut in CRR since January, a 100 bps cut in the statutory liquidity ratio in August and infusion of Rs 1.7 trillion through open market operations, the reduction in average base rates - minimum lending rate charged by banks - has been limited due to high inflationary expectations and increased default risk. After holding the repo rate at 8% since April, RBI has hinted that a rate cut could happen in early 2013. Asymmetric monetary policy transmission Monetary policy transmission has been weak since the RBI front loaded a 50 bps policy cut in April 2012 to bolster growth. From April-September 2012, the base rates across 10 large Indian banks have fallen by only half of this or 25 bps. In contrast, from July 2010 to March 2012, the increase in the maximum and minimum base rates was commensurate with the 275 bps increase in the repo rate over the same period. Rising corporate risk and high inflation limit policy transmission The downward rigidity in lending rates reflects: (i) higher default risk as corporate profitability is being impacted by slowing GDP growth, and (ii) bid by banks to maintain the real rates of return in the light of high inflation. Persistently high inflation at over 7.5% for the last 2 quarters provides limited space for reduction in deposit rates, thereby keeping the cost of funds high for banks despite a 50 bps repo rate cut in April 2012. Higher provisioning on restructured advances to affect profitability The RBI, citing tightening liquidity, decided to support growth with a 25 bps cut in the CRR. The reduction would result in non-income generating funds worth Rs 175 billion flowing into the banking system, thereby lowering the overall cost of funds for banks. This is likely to translate into lower lending rates on select portfolios, especially in the retail segment, and further push credit ahead of seasonal demand pick-up in the second half of the year. CRISIL Research forecasts net interest margins of the banking system to decline by 10-15 bps in 2012-13 as sluggish credit offtake will limit the pricing power of banks. The increase in provisioning on restructured advances to 2.75% from 2.0% will pull down the net profits of banks by about Rs 20 billion. A majority of the increased provisioning would be required by public sector banks. http://www.moneycontrol.com/news/crisil-research/higher-provisioning-to-affect-banks-profitability-crisil_775223.html